New US Sanctions
Sanctions signed into law by U.S. President Barack Obama on New Year's Eve allows the US to cut off financial institutions worldwide who deal with the Central Bank of Iran ("CBI") from the U.S. financial system. The CBI is the main path for payments for Iranian oil, being the main clearing house through which Iran deals with clients around the world. If implemented fully, this will make it near impossible for many refineries worldwide to pay Iran for crude. Given many payments to and from Iran now require the involvement of the CBI, international trading will be challenged further.
However, the U.S. will not automatically take action against those non U.S. banks doing business with the CBI. The new laws allow President Obama to exempt institutions in a country that has significantly reduced its dealings with Iran. He may also grant waivers deemed to be in the U.S. national security interest or otherwise necessary for energy market stability. This represents a half way house between the U.S. hawks and those in the US State Department who consider the stability of global markets should take precedence over punishing Iran and those who do business with it. We will likely see the U.S. implementing these new sanctions in the following ways:
- to physically sanction a very small number of targeted overseas banks who are resident in jurisdictions considered to be neither friendly towards the US nor vital for U.S. interests;
- to use the sanctions as a stick with which to threaten carefully targeted overseas banks - this will be achieved informally with a subtle message as to what might happen if they do not play ball and cease Iranian business. However, we consider that the majority of these overseas banks have already voluntarily ceased links with Iran; and
- certain overseas banks in friendly jurisdictions or jurisdictions which are considered vital for the U.S. will be quietly informed not to worry and they will benefit from a presidential waiver.
Pending EU Sanctions
French Foreign Minister Alain Juppe said yesterday Paris wants new measures taken by January 30, when EU foreign ministers meet. President Nicolas Sarkozy has proposed the EU freezes CBI assets and an EU wide oil embargo.
Italy, Spain and Greece
An EU ban on oil imports will impact Italy, Spain and Greece, who, between them take exports of circa 450,000 barrels of Iranian oil per day. These European countries are likely in the midst of seeking significant "carrots" from their EU neighbours in return for agreeing to an EU ban.
Debt-ridden Greece will be hit particularly hard since they will be forced to buy oil at a higher price without receiving the credit currently afforded to them by Tehran. Russia, Azerbaijan and Kazakhstan are said to have stopped trading with Greece due to perceived credit exposures. The Greeks are reported to have said yesterday they will not break ranks with their EU partners should they impose an oil embargo. It remains to be seen whether the EU will allow a carve-out for Greece and possibly others, alternatively a lengthy run in period before the measures kick in. If so, the EU measures will be symbolic only.
Iran's top trading partner China, which has refused to back new global sanctions against Iran, is demanding discounts to buy Iranian oil as Iran's options narrow. Beijing has cut its imports of Iranian crude by more than half for January, paying premiums for oil from Russia and Vietnam to replace it. China, which bought 11 % of its oil from Iran during the first 11 months of last year, has cut its January purchase by about 285,000 barrels per day, more than half of the close to 550,000 barrels per day that it bought through a 2011 contract.
Turkey is evaluating whether to seek a waiver from the U.S. to exempt Turkish oil importer Tupras from the new U.S. sanctions. U.S. ally Turkey is among the biggest buyers of Iranian oil and gas. It gets about 30 % of its oil from neighbour Iran. Iran announced on December 24, 2011 it had extended its crude export contract with Turkey for 2012. Tupras, Turkey's sole refiner and owned by Turkey's largest conglomerate Koc Holding, purchased over 7 million tonnes of crude oil from Iran in 2010, equivalent to almost 38 percent of the 19.6 million tonnes of crude it refined that year.
India is reducing its dependency on Iranian oil. It is seeking additional oil and natural gas from Persian Gulf nations including Saudi Arabia. Saudi Arabia will increase shipments to some Indian refiners this year as they add plants and seek alternative supplies after a payment dispute with Iran.
Impact on Iran
The new sanctions are the first that could have a serious effect on Iran's oil trade, 60 % of its economy. Although China, India and other non EU countries are unlikely to sign up to any oil embargo, tighter Western sanctions mean such customers will be able to insist on deeper discounts for Iranian oil, reducing Tehran's revenues.
There has already been an impact on the Iranian Rial, which reached a record low yesterday and has fallen by 40 percent against the dollar in the past month. Queues are said to have been forming at banks and some currency exchange offices shut their doors.
Iran faces political uncertainty with an election in March, its first since a 2009 vote that triggered countrywide demonstrations. In a sign of political tension among Iran's elite ahead of the vote, a court jailed the daughter of powerful former President Akbar Hashemi Rafsanjani Tuesday." Rafsanjani sided with reformists during the demonstrations following the 2009 vote.
Brent Crude futures were up more than $4 yesterday afternoon in London, pushing above $111 a barrel on the news of potential threats to supply in the Gulf.
Ironically, whilst aggressive words between the U.S. and Iran will occasionally create a temporary price spike in the global oil price, the growing sanctions on Iran will result in a decrease in the price of Iranian oil. There are simply fewer buyers. This will have a devastating impact on Iran's revenues. The big concern is that Ahmadinejad will push to close the Strait of Hormuz, since, if this results in a significant spike in the oil price, it may bring sales of Iranian oil back to where Iran wants and needs it to be. Ahmadinejad is facing increased domestic pressure. A crisis may well suit him just before an election.
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